Bull put spreads continue to work well in this market, and today we're looking at another example on Marvell Technology.
Marvell Technology recently broke out past resistance and is showing rising relative strength.
Marvell is a fabless designer, developer and marketer of analog, mixed-signal and digital signal processing integrated circuits.
Traders who think Marvell Technology will stay above 70 for the next few weeks could look at a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy: You always know the worst-case scenario in advance.
Trade Can Work With Sideways Action
This type of trade will profit if Marvell trades sideways or higher and even sometimes if it trades slightly lower.
With Marvell Technology trading around 81.60, if we use the Nov. 15 expiration, we can sell a 72.50 put and buy a 67.50 put for around $0.60.
Selling this spread would generate roughly $60 in premium. The maximum risk is $440.
If the spread expires worthless, that would be a 13.6% return in one month. That's provided Marvell is above 72.50 at expiration.
The maximum loss would occur if the stock closes below 67.50 on Nov. 15. In that case, the premium seller would lose $440.
The break-even point for the trade is 71.90. Traders calculate it as 72.50 less the $0.60 option premium per contract.
Exit Strategy For Option Trade
I would set a stop loss if the loss is equal to the amount of premium received. In this case, that would be $60. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Marvell is ranked No. 9 in its industry group. It has a Composite Rating of 84, an EPS Rating of 63 and a Relative Strength Rating of 81.
Marvell Technology is due to report earnings in late November, so this trade should not have any earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
